AC50030E Managerial Finance | Managing Business Operations
Questions:
Calculate the cost of a product or service using traditional and Modern techniques such as Activity Based Costing.
understand the purpose and scope of budgeting and control via use of variances.
Communicate in an effective manner, management accounting information.
(1)
(2)
Keita is a client of your firm and operates a small courier service on the east region of Canada. She is keen to expand the business in the future and has just attended a seminar on the usefulness of management accounting in small companies. She is aware that management accounting is common in manufacturing industries but is unsure of its relevance to service industries such as her own courier company.
Keita has asked you to write a report addressing her concerns as follows:
- Outline the main objectives of budgeting.
- Outline two areas of difference between management accounting and financial
- Explain the difference between fixed budgeting and flexible budgeting.
- Advise Ketia on specific uses of variances within budgetary control.
Report format and bibliography. Marks will be awarded for structure and presentation. (This includes the appropriate use of appendices, clarity of explanation and ability to summarize your findings).
Answers:
Question 1:
Answer to Part A:
|
Particulars |
Units |
|
Total overheads (A) |
£ 748,800 |
|
Labour hours for product X (B) |
32,000 |
|
Labour hours for product Y (C) |
16,000 |
|
Labour hours for product Z (D) |
48,000 |
|
Total labour hours (E) = (B) + (C) + (D) |
96,000 |
|
Overhead absorption rate (A)/(E) |
£ 7.80 |
|
Calculation of product cost: | |||
|
Particulars |
X |
Y |
Z |
|
Prime cost (A) |
£ 64,000 |
£ 64,000 |
£ 72,000 |
|
Overheads (B) |
£ 249,600 |
£ 124,800 |
£ 374,400 |
|
Cost of production (C) = (A) + (B) |
£ 313,600 |
£ 188,800 |
£ 446,400 |
|
Quantity (in units) (E) |
5,000 |
8,000 |
7,500 |
|
Cost per unit (C)/(E) |
£ 62.72 |
£ 23.60 |
£ 59.52 |
Answer to Part B:
|
Materials Inspection Rate: | |
|
Particulars |
Units |
|
Materials inspection (A) |
£ 320,000 |
|
Raw materials for product X (B) |
400,000 |
|
Raw materials for product Y (C) |
240,000 |
|
Raw materials for product Z (D) |
640,000 |
|
Total raw materials (E) = (B) + (C) + (D) |
1,280,000 |
|
Materials inspection per kg (A)/(E) |
£ 0.25 |
|
Machine Maintenance Rate: | |
|
Particulars |
Units |
|
Machine maintenance (A) |
£ 316,800 |
|
Machine hours for product X (B) |
24,000 |
|
Machine hours for product Y (C) |
8,000 |
|
Machine hours for product Z (D) |
16,000 |
|
Total machine hours (E) = (B) + (C) + (D) |
48,000 |
|
Machine maintenance per machine hour (A)/(E) |
£ 6.60 |
|
Production Scheduling Rate: | |
|
Particulars |
Units |
|
Production scheduling (A) |
£ 112,000 |
|
Production set-ups for product X (B) |
105 |
|
Production set-ups for product Y (C) |
305 |
|
Production set-ups for product Z (D) |
215 |
|
Total production set-ups (E) = (B) + (C) + (D) |
625 |
|
Production scheduling per set-up (A)/(E) |
£ 179.20 |
|
Calculation of product cost: | |||
|
Particulars |
X |
Y |
Z |
|
Prime cost (A) |
£ 64,000 |
£ 64,000 |
£ 72,000 |
|
Overheads: | |||
|
Materials inspection (B) |
£ 100,000 |
£ 60,000 |
£ 160,000 |
|
Machine maintenance (C) |
£ 158,400 |
£ 52,800 |
£ 105,600 |
|
Production scheduling (D) |
£ 18,816 |
£ 54,656 |
£ 38,528 |
|
Cost of production (E) = (B) + (C) + (D) |
£ 341,216 |
£ 231,456 |
£ 376,128 |
|
Quantity (in units) (F) |
5,000 |
8,000 |
7,500 |
|
Cost per unit (E)/(F) |
£ 68.24 |
£ 28.93 |
£ 50.15 |
Answer to Part C:
Activity-based costing (ABC) is a highly sophisticated adaptation of the techniques pertaining to traditional absorption costing. Instead of using a single basis for absorbing overhead costs, ABC is involved in deploying a broader group of cost drivers for applying overheads to the products depending on usage of the same (Asongu 2015). Thus, the cost is associated closely with the activity, which causes it. Such association is central to the techniques of ABC and it would lead to effective distribution of overhead costs. Moreover, this association is valuable because it enables the attention of the management to places of greater cost-causing tasks. Therefore, cost could be controlled as well as minimised by concentrating on the task, instead of spend.
Since cost is utilised to compute sale price, inaccurate costs might have serious effects. From the above tables, it could be observed that if traditional approach is utilised for cost, the selling prices for X and Y are nearer or below true cost. In addition, Z is sold at a relatively higher price. Even though this might generate greater profits, the organisation might be in the risk of losing business to the cheaper rivals.
Question 2:
To: Keita, Managing Director of a courier company
Subject: Usefulness of management accounting
Answer to Part (i):
The major objectives of budgeting in a service organisation like a courier company are briefly discussed as follows:
- With the help of budget, planning could be made about the future steps of the organisation along with judging the employees of the organisation based on the set standard (Downen and Hyde 2016).
- The service organisations utilise the process of budgeting as a base for ascertaining the areas of distributing funds to different tasks like purchase of fixed assets.
- In addition, a set of budgets could be developed based on various scenarios for anticipating the financial outcomes of the strategic direction.
- Another objective of developing budget is to utilise it based for reviewing staff performance by using the variances from the budget (Gitman, Juchau and Flanagan 2015).
Answer to Part (ii):
The major points of distinction between management accounting and financial accounting are discussed as follows:
|
Basis of comparison |
Management accounting |
Financial accounting |
|
Information |
It provides both monetary and non-monetary information |
It provides only monetary information. |
|
Timeframe |
These statements are prepared according to the requirements of an organisation. |
The financial statements are prepared at the end of the accounting year. |
Answer to Part (iiii):
The major points of distinction between fixed budgeting and flexible budgeting are demonstrated briefly as follows:
|
Basis of comparison |
Fixed budgeting |
Flexible budgeting |
|
Definition |
It tends to remain unchanged irrespective of the level of activity attained (Dyson 2010). |
It tends to change with any change in the level of activity. |
|
Nature |
It is static in nature. |
It is dynamic in nature. |
|
Level of activity |
It has only single level of activity. |
It has multiple level of activity. |
|
Evaluation of performance |
In case, distinction is inherent in the levels of activity, the contrast between budgeted and actual levels could not be made correctly. |
It gives an effective base for conducting a contrast between budgeted and actual levels. |
|
Rigidity |
Modification is not possible according to the actual volume. |
Modification is easily possible according to the level of activity reached. |
|
Estimates |
It is based entirely on assumptions |
It is highly realistic and practical. |
Answer to Part (iv):
The use of variance within budgetary control is discussed briefly as follows:
- Variance analysis helps effective activity budgeting, since the management hopes to have lesser deviations from the planned budgets. As a result, it enables the managers to prepare highly detailed budgetary decisions.
- It acts as the mechanism of control. The evaluation of large deviation of the major items would enable Keita in obtaining an overview of the causes. This would help Keita to devise out the feasible ways of avoiding such deviation.
- It helps in apportioning responsibility along with involving control mechanism on the departments, in which it is needed. For instance, if the variances related to labour efficiency or raw material cost are not favourable, Keita could improve control of these departments for raising the overall efficiency.
References:
Asongu, S.A., 2015. Finance and growth: new evidence from meta-analysis. Managerial Finance, 41(6), pp.615-639.
Downen, T. and Hyde, B., 2016. Flipping the Managerial Accounting Principles Course: Effects on Student Performance, Evaluation, and Attendance. In Advances in Accounting Education: Teaching and Curriculum Innovations (pp. 61-87). Emerald Group Publishing Limited.
Dyson, J.R., 2010. Accounting for Non-Accounting Students, 8th edition. Prentice Hall.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
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